5.Who is subject to the Regulations?
The Regulations apply to Licensees that carry out any of the following Relevant Activities.
● Banking Businesses
● Insurance Businesses
● Investment Fund Management Businesses
● Lease-Finance Businesses
● Headquarter Businesses
● Shipping Businesses
● Holding Company Businesses
● Intellectual Property Businesses
● Distribution and Service center Businesses
Please refer to Schedule 1 of Ministerial Decision 100 for an explanation and examples of each activity.
6. What is a Licensee?
A Licensee is a juridical person or an unincorporated partnership that is registered in the UAE and that undertakes a Relevant Activity.
By way of example, a Licensee can be:
● A limited liability company
● A private shareholding company
● A public shareholding company
● A joint venture company
● A partnership (e.g. a limited liability partnership, a limited partnership, a general partnership, etc.)
The following persons are not considered “Licensees" under the Regulations:
● A natural person
● A sole proprietorship
● A Trust
● A Foundation
7. Are branches subject to the Regulations?
Branches registered in the UAE are an extension of their “parent" or “head office" and do not have separate legal personality.
As such, the “parent" or “head office" registered in the UAE must file as a single Licensee, reporting the Relevant Activities of itself and all its branches in one composite Notification and / or Economic Substance Report.
A UAE branch of a foreign entity that carries out a Relevant Activity would be required to comply with the Regulations as if it was a separate legal person, unless the Relevant Income of the branch is within the scope of taxation in the jurisdiction of the foreign parent / head office. The “subject to tax" test is met where the income of the UAE branch is taken into account when calculating the taxable income of the foreign parent / head office or other relevant group entity reporting the Relevant Income of the UAE branch for corporate income tax purposes, irrespective of whether the income of the UAE branch can benefit from an exemption or other form of corporate tax relief in the foreign jurisdiction under domestic tax law or a double tax agreement.
Where a UAE entity carries on a Relevant Activity through a branch registered outside the UAE, the UAE entity is not required to consolidate the activities and income of the foreign branch for purposes of the Regulations, provided the Relevant Income of the foreign branch is subject to tax in the foreign jurisdiction where the branch is located. In this context, a branch can include a permanent establishment or any other form of taxable presence for corporate income tax purposes which is not a separate legal entity.
8. What does it mean to be subject to the Regulations?
Administration (For additional information refer to Section K)
Licensees that undertake a Relevant Activity are required to file an annual Notification within six months from the end of the relevant financial period (see Administration).
In addition, Licensees that earn income from their Relevant Activity(ies) are also required to file an Economic Substance Report within 12 months from the end of the relevant financial period (see Administration).
For each financial period in which a Licensee earns income from a Relevant Activity, it will need to meet an Economic Substance Test in relation to that activity.
The Economic Substance Test requires a Licensee to demonstrating that:
● the Licensee and Relevant Activity are being directed and managed in the UAE;
● the relevant Core Income Generating Activities (CIGAs) are being conducted in the UAE; and
● the Licensee has adequate people, premises and expenditure in the UAE.
9. Do the Regulations only apply to UAE entities that are part of a foreign multinational group?
No. The Regulations impose economic substance requirements on any UAE entity which carries on a Relevant Activity, regardless of whether the UAE entity belongs to a foreign multinational group.
However, a UAE based Distribution Business, Service center Business, Headquarter Business or High-Risk IP Business would only be within the scope of the Regulations if the UAE entity transacts with foreign group companies. Distribution, Service center, Headquarter and High-Risk IP activities and transactions between UAE entities are not subject to Regulations.
10. Is a company registered under an ‘offshore’ free zone company regime subject to the Regulations?
Yes, if the ‘offshore’ company undertakes a Relevant Activity.
11. Do the activities listed on the commercial license determine whether a Licensee undertakes a Relevant Activity?
No. Whilst the commercial license may indeed state the Relevant Activity, a 'substance over form' approach must be used to determine whether a Licensee undertakes a Relevant Activity and is within the scope of the Regulations. This means looking beyond what is stated on the commercial licence to the activities actually undertaken by the Licensee during a financial period.
12. When should a Licensee assess whether it undertakes a Relevant Activity?
This assessment needs to be done for each financial period starting on or after 1 January 2019, and should take into account the activities undertaken by the Licensee at any time throughout the relevant financial period.
13. Who is exempt from the Regulations?
The following Exempted Licensees are exempt from filing an Economic Substance Report and the requirement to demonstrate substance in the UAE:
● A Licensee that is tax resident outside the UAE;
● An Investment fund and its underlying SPVs / investment holding entities;
● A wholly UAE resident-owned business that is not part of a multinational group and that only carries on business in the UAE;
● A branch of a foreign entity that is subject to tax on all of its Relevant Income in a foreign jurisdiction.
Sufficient evidence must be submitted along with the Notification form to claim any of the above exemptions. Please refer to Ministerial Decision 100 for more information.
14. What if a Licensee does not undertake a Relevant Activity during a financial period?
If a Licensee does not undertake a Relevant Activity during a financial period, it does not need to meet the Economic Substance Test.
The Licensee would not be required to submit a Notification (see Question 43) or submit an Economic Substance Report (see Question 45) for the relevant financial period.
15. What if a Licensee undertakes a Relevant Activity, but does not earn any income from that activity during a financial period?
A Licensee that undertakes a Relevant Activity but that does not earn income from this activity in a financial period, is not required to meet the Economic Substance Test or file an Economic Substance Report for that period.
However, the Licensee would still need to submit a Notification on the Ministry of Finance filing portal.
16. What if all income from the Relevant Activity is earned from outside the UAE, is the Licensee exempt from the Regulations?
No. Income from a Relevant Activity for which the Licensee needs to demonstrate economic substance in the UAE includes all income, including income that is generated by the Licensee outside of the UAE.
However, please refer to Question 7 for the treatment of a foreign branch of a UAE entity that earns income from a Relevant Activity.